The historical and current climate of
microfinance in India
In the developing world, India presents a
unique opportunity and need for poverty
alleviation. India’s stable political
environment and strong economic growth
over the last 10 years have put the country
in a position to become the third-largest
economy in the world by 2050.1 At the
same time, India accounts for the largest
share of the world’s poor with over 860
million people in 2006 living on less than
US$2 a day2 and economic development
characterised by a widening income gap
between the rich and poor parts of the
country.3
The vast numbers of poor people, combined
with an increasingly favourable economic
climate in India, presents a great opportunity
to expand microfinance and alleviate poverty
on a large scale.
Development of the microfinance
environment
Since Indian independence in 1947,
successive governments have emphasised
the link between improving access to finance
and reducing poverty.
The creation of a nationwide network of rural
cooperative banks in the 1950s was an
attempt to improve financial access for
India’s poor, 75% of whom are concentrated
in rural areas.4 This was followed by further
measures aimed at increasing financial access
- the nationalisation of commercial banks in
the late 1960s, and an aggressive drive
through the 1970s and 1980s to expand rural
banking.
In 1991, government reforms allowed for an
increase in commercial banking in India. The
country now has a wide-spread and efficient
banking set-up with around 100,000 bank
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branches nationwide.5 The expansion of
commercial banking has also led to a more
favourable financial environment for the poor
in India. It was following these reforms that
the “Self-Help Groups (SHGs)–Bank Linkage”
model grew to become a key part of finance
for India’s poor.
Self Help Groups (SHGs) are informal
associations of up to 20 women. The groups
provide an opportunity for individuals to
pool money, and then use these funds to
lend small amounts to each other with
interest. Through the SHG Bank Linkage
Program, established groups can apply for
loans through their local bank branch, limited
in size to a ratio of the group's own funds.
This limit may be increased over time as
previous loans are successfully repaid. This
model of finance – an Indian innovation – has
been very successful, increasing from just 500
SHGs linked to banks in the early 1990s, to
over one million at present.6
However, outreach of the SHG Bank Linkage
Program remains limited. The program has
provided savings account facilities to about
12 million women, and credit accounts to an
estimated two to four million women.7 The
program remains concentrated in south
India, with nearly 75% of funds flowing to
SHGs in the four southern states.8 The SHG-
Bank model has also had mixed success in
targeting the poorest. For example, in Andhra
Pradesh – one of India’s poorest states – less
than half of SHG members are from the
poorest groups (as defined by size of land-
holding).9
There are also limitations in the way the
model operates. SHGs are required to
demonstrate an ability to save, learn
bookkeeping skills and act as a cohesive
 group before they are permitted to borrow
and because of this it can often take a year
before groups are allowed to receive their
first loans.
In recent years, other institutional structures
for microfinance have emerged: notably,
independent specialised microfinance
institutions (MFIs). The success of MFIs in
India has also attracted several new private
sector banks, notably ICICI Bank, UTI Bank
and HDFC Bank. Some of these newer banks
are pursuing innovative approaches to
microfinance. They view microfinance as a
potential business rather than simply a social
objective or priority sector lending
obligation.
While the SHG Bank model is defined by the
links between SHGs and the rural branches
of commercial or cooperative banks, MFIs are
typically independent of the existing rural
banking network. This allows MFIs to take a
more flexible approach to lending. However,
as with the SHG model, most MFIs provide
financial services to groups
The vast majority of individuals and therefore
face many of the same
of India’s rural issues around the cost and
poor still do not time required to promote
and manage these groups.
have access to
formal finance. Currently, 75% of the total
supply of microfinance
credit is via the Self Help
Group-Bank linkage route, largely financed
by the National Bank for Agriculture and
Rural Development (NABARD). The rest
comes from MFIs, increasingly backed by
commercial banks.10
The need for a new microfinance
initiative
In spite of the success of the SHG model in
the 1990s and continued growth of MFIs, the
vast majority of India’s rural poor still do not
have access to formal finance.11
The rural poor face severe difficulties
accessing savings and credit from the formal
sector. Even where finance is available, it
takes, on average, 33 weeks for a loan to be
approved by a commercial bank.12 This makes
formal credit an unrealistic option for poor
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people, particularly for the purpose of
meeting unforeseen expenses or
emergencies. Difficulty in accessing formal
finance has resulted in a heavy reliance on
informal finance.
Access to other financial services, such as
insurance, also remains limited among the
poor. A 2003 survey showed that 82% of
households surveyed had no insurance, with
access particularly limited for the poorest
households.13
Significant obstacles to expanding the
commercial sector are likely to persist in the
short to medium term. These obstacles arise
from government imposed restrictions, and
from the commercial sector’s own policies,
such as limited numbers of rural branches
and employing few staff with local
knowledge.
As a result of such obstacles, most
microfinance institutions have been very
region-specific, small in size and their
collective outreach has been limited. By
2004, the microfinance sector, as a whole,
had outstanding portfolios of around A$150
million, reaching less than two million
people.14 In comparison, MFIs in Bangladesh
are reported to reach more than 60% of the
poor in the country, with the larger programs
- such as Grameen Bank, BRAC, Proshika and
ASA - all reaching well over one million
clients each.15
Though India has experienced strong
economic growth at the national level in
recent years, that growth has been uneven in
its geographical distribution. Despite recent
progress, India’s lower-income regions have
not seen growth accelerate. Bihar (a state in
north India) averaged 2.2% growth between
1980 and 2004, compared to 7.2% in
Karnataka (a southern India state).16
This skewed distribution of growth is
mirrored in the extent and availability of
microfinance across regions. India’s lesser
developed and low-income eastern, central,
and north-eastern regions account for 54% of
the population, but only 20% of outstanding
credit and 29% of deposits.17
Slower economic growth in
the central, eastern, and
north-eastern states has
also resulted in little
demand for credit among
subsistence poor people.
This has been matched by
an absence (for historical
reasons) of good quality
NGOs willing to initiate
microfinance programs in
these states.
Some 60% of the increase
in India's population
between now and 2050 is
expected to come from four of India’s most
populous and poorest states where financial
access for the poorest people is less
prevalent.18 Extending the scope and
availability of microfinance is therefore
particularly important given the population
growth expected in India’s poorest states
over the medium to long term.
An opportunity for a new microfinance
initiative
India’s recent economic history is one of
sustained and rapid growth. India's real GDP
grew by 9.2% in 2006 and by just over 8% in
the three years before that. This compares
with a figure of around 6% in the 1980s and
1990s, and 3.5% in the three decades before
1980.19 Though the economy remains mostly
agricultural, business processing, information
technology, telecoms and manufacturing
have boomed in recent years. Looking
forward, the government's five-year plan to
2011/12 is based on a target of 9% average
annual growth. The consensus of economic
forecasters in India is for growth of at least
8% over the next five years. However, there is
also a broad consensus that weak
infrastructure investment and bureaucratic
red-tape present risks to India’s economy.
The government must address these issues to
ensure sustained future growth.20
In the short term, growth is forecast to
moderate slightly in 2007/08 and 2008/09
but domestic demand is expected to remain
buoyant. This will provide a positive
environment for business start-ups, as 97% of
retail sales are made from microbusinesses.21
Accordingly, retail sales from these small
businesses are expected to grow by A$77
billion in the next three to four years (from
A$370 billion to A$447 billion).22
India’s fiscal budget for 2007 has been
depicted by the government as a budget for
relieving poverty through ‘inclusive growth,
equity and social justice’.23 Boosting farm
output and raising spending on education
and health are two of the key measures in the
budget.
The Indian government has also given
approval for enactment of legislation on the
microfinance sector in India. The Micro
Financial Sector (Development and
Regulation) Bill, 2006 will provide a legal
framework for entities engaged in
microfinance. The intention of the Bill is to
facilitate greater transparency, more effective
management and better governance of the
microfinance sector.24
The entrepreneurial environment for poor
families in India has also improved in recent
years. For example, the availability of
telephone and internet services has
improved significantly in rural areas in the
past five years. These services give instant,
low-cost information on the relative prices of
products and services in different market
towns greatly improving an individual’s
bargaining power relative to more powerful/
wealthier traders. The internet has also made
crucial information available to individuals
that would previously have taken time and
expense to access – for example, land records
and passport application forms.
 Conclusion
There is an enormous continued need for
microfinance for the poorest people in India.
India has been, for many years, a ‘global
laboratory’ for anti-poverty programs. The
political, regulatory and economic
environment for microfinance has been
steadily improving for many years now.
Recent strong growth in microfinance – albeit
from a low base – suggests that the
environment is favourable and demand for
financial services is strong. However,
coverage continues to be partial, with a huge
number of poor households in India still
unable to access finance.
Recent rapid growth in the east, continued
deregulation and the current strong
economic environment all suggest that there
has probably never been a more favourable
time for an initiative to increase the
availability of microfinance across India.
Opportunity International Australia has
developed a strategy for a national
microfinance and enterprise development
program in India which aims to reach millions
of clients in the coming years. This strategy
includes extension of microfinance to many
areas in the north and northeast of India,
where demand for financial services grossly
outweighs supply.
References
1.World Bank, 2006 World Development Indicators
database, April 2006
2. Jim O’Neill et al, How Solid are the BRICs?, Global
Economics Paper No:134, Goldman Sachs, December
2005
3. Haruhiko Kuroda (President, Asian Development
Bank) – cited in: Asia faces growing poverty gap, BBC
News online, February 2007
4-9, 11-15, 17. Priya Basu, Improving Access to Finance for
India’s Rural Poor, World Bank Publications, 2006
10. Prabhu Ghate, Microfinance in India – A State of the
Sector Report, Care/Ford Foundation, 2006
16. Praful Patel, India: Shining India’s Light on all Citizens,
www.worldbank.org.in 2007
18. The Economist, Survey: Business in India – Still in the
Way, print edition, Delhi, June 2006
19, 20. The Economist, India on Fire, print edition, Delhi,
February 2007
21. The Economist, India’s economy,
www.economist.com February 2007
22. The Economist, Setting up shop in India, print edition,
Delhi, November 2006
23, 24. New Age Press, India steps up war against poverty
in fiscal budget for 2007, Dhaka, March 2007

Opportunity International is a global leader and pioneer with over 35 years experience in providing microfinance and enterprise
development to the working poor in developing countries. Microfinance includes the provision of collateral-free loans, savings,
insurance and money transfers. Enterprise development incorporates a variety of training and support services for establishing
and growing small businesses. Our desire is to see clients, their families and their communities transformed with dignity,
empowerment and hope. Opportunity is inspired by Jesus Christ’s call to serve the poor without regard to ethnicity, gender or
religious affiliation. We are guided by four core values: respect, commitment to the poor, integrity and stewardship.

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